Have You Heard About Free Gold?

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I've asked my friend, colleague and fellow gold investor Tom Cullis to explain a somewhat complicated concept known as "Free-Gold." At the surface, this concept may appear to be nothing but a simple call to return the dollar or other world currencies to the gold standard. But that's not quite the whole story. It's not even what Free-Gold is really about.

I'm really excited to have Tom delve into this concept, because I believe it's just starting to gain momentum, and it's rapidly approaching a "tipping-point" moment. I think you'll be hearing a lot about Free-Gold - at first from people like me, but then increasingly from mainstream investment sources and eventually you won't be able to turn on the TV or open a newspaper without hearing about it.

And before I ask Tom to step into the mysterious waters of Free-Gold, I want to assure you that this series of essays is not a part of a Free-Gold sales pitch . We're not selling Free-Gold. Free-Gold is basically just a very high-level way of thinking about what's going on with the world's money system right now. The only thing we're likely to tell you as a result of understanding Free-Gold, is something that you probably already believe: you need to own physical gold, and not just a little bit!

Regardless of how you feel about the dollar, or the gold standard or any other money system, the concept of Free-Gold is something I think you need to be at least somewhat familiar with - especially if you already own physical gold or you're thinking about buying more.

Without further ado, here's Tom:

Before I get into the nitty-gritty of how Free-Gold works, I have been asked to quickly and simply describe Free-Gold. It is a complex subject, and I will go into more specific detail, but in a nutshell, Free Gold advocates that you own and hold physical gold first and foremost.

Okay...now into the nitty-gritty, because it's not enough to know what to do, it's much more important to know why...

The major challenge that investors, economists and even the general public face these days is figuring out what major causes are behind the historically significant (and scary) swings in the markets the past few years.

Precious metals, commodities, equities and bonds have all gone on roller coaster rides and have shaken (and bankrupted) many who didn't have a strong grasp on what was going on. The conclusion many economists and investors have come to is that the US Dollar is facing a crisis in the near term and the financial players big and small who believe this are positioning themselves for the aftermath.

Before you can safely put together a portfolio to profit from this type of change you have to first have a good understanding of what will come after the collapse of the world's reserve currency. Many possibilities have been suggested from the Special Drawing Rights of the IMF replacing the dollar to the return of the gold standard.

Free-Gold is an alternative that recognizes the flaws inherent in the reserve system, be they physical or fiat, and embraces the possibility that a reserve currency need not exist.

Free-Gold is in essence a solution to the major problem in the financial world and the one question that needs to be answered before real economic growth can resume.

How are all the losses that are built into the current system going to be distributed?

To get from where we are to a solid understanding of Free-Gold we have to consider both the economic and political ramifications of getting out of the mess we are in.

To defeat your enemy you must first know your enemy and the foe we face is debt. To be more specific, it is low interest bearing debt which exposes the hidden problem with Keynesian and Monetarist economics, and the reason it seems to work great right up until it doesn't.

Here's a brief history of Keynesian policies in this country:

The late 1940s through late 60s were boom times that gave the appearance of control and almost prescience by the Fed that would enable the economy to stroll into the future only experiencing minor recessions.

The stability of the 80s and 90s revived this myth right up until, again, the point that it all stopped working. Expansionary economics, that is growth based on an expanding money supply, works on the idea that continually increasing the value of assets makes people both feel richer and want to invest more.

The "wealth effect" of watching your stocks and home rise in value year after year leads to more consumption because why not spend more if every signal you get is that you are making more? Higher returns also encourage people to invest more as well. Obviously it is impossible for people to actually invest and spend more simultaneously in this way based on higher stock and home prices which is why this "growth" is based on borrowing and leverage.

That's where we are today. In the recent past we saw the creation of CDS, CDOs, interest rate swaps (as well as many other "wealth inventions") as ways to trade small percentages of interest without actually moving anything physical or even tangible!

Expansionary policy works by lowering interest rates. Lower rates make it cheaper to borrow money which means servicing debt is cheaper and more money can be borrowed. Ultimately projects can be bigger (the largest buildings in the world are built right as bubbles are bursting) and more expensive because of these lower rates.

Lower rates also make older loans made at higher rates more attractive. If the prevailing rate is 8% and I hold loans that are likely to be paid off at 10% you have to offer me a premium to get them onto your balance sheet. I think we can all see where the big problems come in- when rates simply can't go any lower the opportunities for this type of growth vanishes seemingly overnight.

Debt at record low rates is such a huge problem because rates have no room to go down and as rates rise, assets are hit with the double whammy as the above process reverses.

The only other option is holding rates constant which leads to years without growth while piling on more and more debt (hello Japan) with each year making the prospect of increasing rates more painful.

This is why we must accept that debt is our enemy and the only question we face is who is going to take the pain and how.

You might think you already know the answer to this question already.

Check out part two of this essay in which I explain how Central Banks and Governments have no choice but to pass on these bad debts onto everyone who owns dollars and dollar denominated assets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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